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DWS has been in the sights of regulators in Germany and the U.S. since former executive turned whistleblower Desiree Fixler accused the firm of greenwashing last year.RALPH ORLOWSKI/Reuters

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When about 50 German police officers raided the Frankfurt office of fund manager DWS Group last month as part of an investigation into greenwashing, the move marked the beginning of what many believe will be a long legal reckoning for the asset management industry.

Interest in sustainable investing has taken off in recent years, with assets managed in environmental, social and governance (ESG) labelled funds globally ballooning to some US$2.7-trillion, but the industry has also been hit by claims its green credentials are inflated.

DWS, whose chief executive officer Asoka Woehrmann resigned the day after the police arrived to gather materials and question staff, has been in the sights of regulators in Germany and the U.S. since former executive turned whistleblower Desiree Fixler accused the firm of greenwashing last year.

But with regulatory scrutiny growing on both sides of the Atlantic – and an army of lawyers primed to pursue allegations of mis-selling – few believe the shakeout will end with DWS.

“There’s nothing to suggest DWS is a one-off. It’s almost inevitable litigation will be brought in lots of different jurisdictions,” says Fiona Huntriss, a partner at law firm Pallas Partners LLP who specializes in financial litigation.

“Where you have statements and documents that are highly regulated [that have been given] to a group of investors who can then work together to litigate against that, it’s prime territory for mis-selling claims,” she says.

Regulators across Europe and the U.S. are gearing up to tighten requirements and crack down on overhyped claims, including taking aim at the metrics underpinning ESG ratings.

The hunt for greenwashing has accelerated in Washington since March, when the Securities and Exchange Commission (SEC) announced it would prioritize uncovering exaggerated ESG performance and advertising claims by investors.

It emerged last week that the SEC is investigating Goldman Sachs Group Inc.’s asset management division over certain ESG claims made by its funds. Goldman Sachs declined to comment.

Back in Germany, DWS has modified ESG criteria since Ms. Fixler made her revelations public. The amount of “ESG assets” reported in its latest annual report, released in March, were 75 per cent below the €459-billion it had said were “ESG integrated” a year earlier. The group has denied wrongdoing.

Rumblings that an industry-wide mis-selling scandal may be brewing began when Ms. Fixler made her allegations about DWS public and former BlackRock Inc. sustainability executive Tariq Fancy said ESG investing was little more than “marketing hype.”

The debate was given fresh impetus when Stuart Kirk, HSBC’s head of responsible investing, gave a controversial speech last month in which he claimed central banks and policy-makers had overstated the financial risks of climate change.

ESG “has become a bureaucratic tax and we need to get it back on track,” Ms. Fixler told the Financial Times. The DWS raid “is the real wake-up call for all ESG practitioners to back up statements and products with substance and data.”

Gary Gensler, SEC chair, tells the Financial Times: “We live in a time at which investors are currently making decisions about climate risks. And around the globe, many market regulators just like the SEC are trying to bring some standardization to those disclosures.”

The agency will prioritize rule writing, but will also use examination and enforcement tools when needed, Mr. Gensler says.

“It’s about truth in marketing ... and promoting better competition in our capital markets. If people are competing for funds, let them compete with accurate [and] consistent disclosures,” he says.

The SEC announced its first case against an investment firm over alleged ESG misconduct in May, with Bank of New York Mellon Corp.’s investment arm agreeing to pay US$1.5-million to settle charges from the regulator. The SEC proposed new rules on labelling and disclosure for ESG funds two days later.

The U.S. regulator will be examining proxy voting behaviour, and a firm could find itself in trouble if its ESG or so-called impact funds voted consistently with corporate management and against ESG-focused shareholder proposals, according to a person familiar with the SEC’s approach.

In Europe, authorities in Germany, the Netherlands and France have issued additional ESG labelling requirements on top of European Union bloc-wide disclosure rules that came into force in March 2021.

Although the DWS raid appeared to be the first potential criminal action linked to ESG in any jurisdiction, according to Elaina Bailes, partner at Stewarts Law LLP, civil litigation on greenwashing has taken off more quickly in America.

“We have seen more general shareholder and investor activism in the U.S. You see the regulator mirroring that and being aggressive,” she adds.

The trade body for Germany’s asset management industry pins some of the blame for the current scrutiny on a lack of clarity from regulators on how to define the parameters of ESG investing.

“The supervisors also struggle with the criteria,” the German Investment Funds Association BVI said in a statement. “Currently, we see a vacuum of guidance.”

As scrutiny grows, law firms are enjoying a surge of interest on the subject – both from asset managers wanting to avoid accusations of greenwashing and from investors looking to launch legal action over securities they believe were mis-sold.

These claims often take time to emerge, according to Ms. Huntriss at Pallas, who noted that she was still working on cases linked to the collapse of Lehman Brothers Holdings Inc. in the 2008 global financial crisis.

“This isn’t an immediate flash in the pan, and it will take time for this to unravel. If you don’t see litigation filed next week, it doesn’t mean it’s not going to happen. This has got a long, long way to run,” she says.

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